recoveries under income tax and insolvency and bankruptcy code€¦ · insolvency and bankruptcy...

Recoveries Under Income Tax And Insolvency and Bankruptcy Code

CA. Divakar Vijayasarathy

DVS Advisors LLPIndia-Singapore-London-Dubai-Malaysia-Africa

www.dvsca.com

Credits and AcknowledgmentsJugal Gala

Bharathi Priya R DThirumal V

Presentation SchemaRecovery of Tax

under IT ActAssessee in

DefaultModes of Recovery

Who Can Be A TRO?

Validity, Cancellation or Amendment of

Form 57

Stay of Proceedings

Recovery through State Government

Recovery of Tax In Foreign Countries

Recovery under Other Law Not

Affected

IBC – An Overview, Applicability and

Objective

Relevant TermsCorporate Insolvency

Resolution Process

Fast Track Corporate Insolvency

Resolution Process

Voluntary Liquidation of

Corporate Persons

Offences and Penalties

Recovery Of Income Tax When

Company Is In Liquidation

Judicial Precedents Global Perspective

Recovery of Tax under Income Tax Act – Sec 222

Tax Recovery Officer (TRO) will give a statement signed by him in the prescribed Form No 57

To an assessee who is in default or is deemed to be in default in making a payment of tax

Form No 57 will specify the amount of arrears due from the assessee

Tax means income-tax chargeable under the provisions of this Act

Assessee in Default

When notice of demand in Form No 7 is sent

To the assessee for payment of any tax, interest, penalty, fine or any other sum payable in consequence of anorder passed under Sec 156

And if the assessee fails to pay such amount within 30 days from the date of receipt of notice

He shall be termed as Assessee in default

Modes of Recovery

Attachment and sale of the assessee’s movable property and immovable property

Arrest of the Assessee and his detention in prison

Appointing a receiver for the management of the assessee ‘s movable and immovable properties

Other modes of recovery under Sec 226

Assessee’s movable and immovable property will include the property transferred either directly orindirectly for inadequate consideration to his spouse or minor child or son’s wife or son’s minor child

Other Modes of Recovery – Sec 226

Deduction from Salary

Application to Court for

payment of Assessee’s

money in court’s custody

Collection from persons who

owe money to Assesee

Distraint and Sale of

Assessee’s Movable Property

Certificate drawnup under Sec 222

The TRO without prejudice to any methods in Sec 222

The Assessing OfficerNo

Yes may recover the taxby any one or more ofthe modes provided:

Who can be A TRO?

TRO within whose jurisdiction

Where the assessee carries on his business or profession

Where the principal place of his business

or profession is situated

Where the assessee resides

Where any movable or immovable

property of the assessee is situated

Section 223

Validity, Cancellation or Amendment of Form 57 –Sec 224

Assessee cannot dispute the correctness of any certificate drawn up by the TRO

Or to correct any clerical or arithmetic mistake

TRO can cancel the certificate i.e. Form 57 for any reason

Stay of Proceedings – Sec 225

TRO can grant time for the payment of any tax and when it

does so, it shall stay the proceedings for the recovery of such tax until the expiry of the

time so granted

When Form 57 is modified in appeal or any proceedings under

the Act and the demand is reduced and order is subject

matter of further proceedings then TRO shall stay the recovery

of the disputed part

Where an order has been passed to reduce the amount of recovery

pursuant to an appeal or proceedings, then TRO shall

amend or cancel Form 57 when such appeal becomes final

Recovery through State Government – Sec 227

If the recovery of tax in any area has been entrusted to a State Government

The State Government may direct, with respect to that area or any part thereof that tax shallbe recovered

In the same manner as the municipal tax or local rate is recovered from the same person

Recovery of Tax in Foreign Countries – Sec 228AWhere Agreement for recovery of income-tax has been entered between the two countries:

Government of that country or anyspecified authority sends to CBDT acertificate for the recovery of tax due

From a *resident orperson having anyproperty in India

CBDT forwards the certificateto TRO having jurisdiction overthe such specified person

Assessee is or deemed to be indefault in making a payment of tax

TRO forwards to CBDT thecertificate under Sec 222

Being a resident of the other country (with which Indiahas agreement for recovery) or *has property in thatcountry

• TRO recovers the due in the same manner as specified under Sec 222• Remits the sum recovered to CBDT after deducting any recovery expenses

CBDT takes appropriate steps forrecovery as per relevant agreement

* Amendment in Final Budget, 2019 delivered on 5th July, 2019

Penalties, Fine, Interest and Other Sums – Sec 229

Any sum imposed by way of interest, fine, penalty, or any other sum payable underthe provisions of this Act, shall be recoverable in the same manner provided for therecovery of arrears of tax

Recovery under Other Law not Affected – Sec 232

Modes of recovery shall not affect

Any other law for the time being in force relatingto the recovery of debts due to Government

The right of the Government to institute a suitfor the recovery of the arrears due from theassessee

Assessing Officer or Government can have recourse to any such law or suit

IBC – An Overview

IBC – Insolvency and Bankruptcy Code

The IBC was enacted on May 28, 2016

The sole objective of the IBC 2016 is to find solutions for stressed assetson account of them being non-performing

IBBI – Insolvency and Bankruptcy Board of India is the regulatory authority for IBC

Applies to whole of India including Jammu and Kashmir except for Part III which is applicable for individuals and partnership firms

Objective

IBC is a consolidation of laws relating to reorganization and insolvencyresolution

Improved handling of conflicts between creditors and debtors

Flexibility for parties involved to arrive at the most efficient solution tomaximize value during negotiations

Clear allocation of losses

Resolution in short duration

Applicability of IBCCompany

incorporated under Companies Act, 2013

Company incorporated under

any previous law

Other Company governed under any

special Act

Partnership firms and LLP

Notified entity

Individuals

Provisions relating to Insolvency and Bankruptcy of Individualsand Partnership Firms is not yet notified and hence noteffective

Relevant Terms• Right to payment or Right to remedy for breach of contract and such breach

gives rise to right to payment Claims – Sec 3(6) of

IBC, 2016

• Liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt

Debt – Sec 3(11) of IBC, 2016

• Means a Company and Limited Liability Partnership (LLP)Corporate Person Sec 3(7) of IBC

• Corporate person who owes a debt to any personCorporate Debtor Sec 3(8) of IBC

• A person to whom a financial debt is owed and includes a person to whomsuch debt has been legally assigned or transferred

Financial Creditor Sec 5(7) of IBC

• Any person to whom an operational debt is owed and includes any person towhom such debt has been legally assigned or transferred

Operational Creditor Sec 5(20) of IBC

• A claim in respect of the provisions of goods or servicesincluding employment or a debt in respect of the repayment of dues arisingunder any law for the time being in force and payable to the CentralGovernment, any State Government or any local authority."

Operational Debt Sec 5(21) of IBC

Contd…

Financial debt Sec 5(8) of IBC means a debt along with interest, if any, which is disbursed against theconsideration for time value of money and includes

1. Money borrowed against payment of interest2. Any amount raised by acceptance or its de-materialized equivalent3. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar

instrument4. The amount of any liability in respect of any lease or hire purchase contract (only finance lease)5. Receivable sold or discounted other than any receivable sold on non-recourse basis6. Any amount raised under any other transaction having the commercial effect of borrowing7. Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price8. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other

instrument issued by a bank or financial institution9. The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred above

Corporate Insolvency Resolution Process

Consequences of Non-submission of Resolution plan

Preparation and Approval of the Resolution Plan

Formation of the Committee of Creditors

Appointment of Interim Resolution Professional

Moratorium and Public Announcement

Adjudication: Admission or Rejection of Application

Filing of Application before NCLT

Insolvency and liquidation of corporate debtors can be done only when theminimum amount of default is ₹1,00,000

Time limit for completion of entire process will be 180 days which may be furtherextended by 90 days by the Adjudicating Authority

Filing of Application Before NCLT

Application before the Adjudicating Authority for initiating a corporate insolvency

Financial Creditor Operational Creditor Corporate Debtor

Adjudicating Authority for Corporate persons will be National Company Law Tribunal (NCLT)

When Application can be Filed ?Financial creditor Operational creditor Corporate Debtor

1. A financial creditor or creditors maymake an application for initiatingcorporate insolvency resolutionprocess against a corporate debtorwho commits a default in paymentof its dues

2. Fees for filing application isRs.25,000

1. Send Demand notice and a copy ofinvoice to the corporate debtor

2. Within 10 days of receipt ofdemand notice the corporatedebtor should notify theoperational creditor about thedispute and also provide detailsabout the repayment of unpaidoperational debt

3. After the expiry of 10 days if nopayment is received thenoperational creditor can file anapplication


1. Where a corporate debtor hascommitted a default, it can file anapplication before the adjudicatingauthority for initiating corporateinsolvency resolution process

2. He shall furnish information relatingto books of accounts and otherdocuments

3. Name of a Resolution Professionalproposed to be appointed asinterim resolution professional isrequired


Persons not Eligible to Apply for Insolvency Process – Sec 11 of IBC, 2016

A corporate debtor undergoing a corporate insolvency resolution process

A corporate debtor having completed corporate insolvency resolution process 12 months preceding the date of making of the application

A corporate debtor or financial creditor who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application

A corporate debtor in respect of whom a liquidation order has been made

Adjudication

Declare Moratorium – Sec 14 of IBC, 2016

Cause a public announcement of the initiation of corporate insolvency resolution process andcall for the submission of claims – Sec 15 of IBC, 2016

Appoint an Interim Resolution Professional (IRP) – Sec 16 of IBC, 2016

Adjudicating Authority after admission of the application shall by an order

Application before the adjudicating authority can be rejected or admitted within 14 days from the date ofreceipt of application, however, an opportunity of being heard shall be provided on rejection

Moratorium – Sec 14 of IBC, 2016

After the commencement of corporate insolvency resolution

a calm period for 180 days is declared

During moratorium period all suits and legal proceedings

against the corporate debtor are held in abeyance

Moratorium period is the time given to the defaulter to resolve

its status

Public Announcement – Sec 15 of IBC, 2016Public announcement of the corporate insolvency resolution process shall contain the following

Name and address of the corporate debtor under the corporate insolvency resolution process

Name of the authority with which the corporate debtor is incorporated or registered

The last date of submission of claims

Details of Interim Resolution Professional (IRP)

Penalties for false or misleading claims

The date on which the corporate insolvency resolution process ends

Appointment of Interim Resolution Professional (IRP) – Sec 16 of IBC, 2016Adjudicating Authority shall appoint an interim resolution professional within 14 days from the insolvencycommencement date i.e. date of acceptance of application

If application is made by financial creditor or corporate

debtorIf application is made by

operational creditor

Resolution Professional asproposed respectively by theapplicant shall be appointedas interim resolutionprofessional, if no disciplinaryproceedings are pendingagainst him

Adjudicating authority shall makea reference to the Board forappointing interim resolutionprofessional and the referredperson (by NCLT) will beappointed as IRP if no disciplinaryproceedings are pending againsthim

The term of IRP shall not exceed 30 days from the date of his appointment

Formation and First Meeting of the CoC

IRP shall collect all the claims of creditors received against

corporate debtor

Determine financial position of the corporate debtor

Constitute the Committee of Creditors (CoC)

• All financial creditors• Related parties of corporate debtor cannot form

part of CoC

Composition of Committee of Creditors (CoC)

• First meeting of the CoC shall be held within 7 days of the constitution of CoC• All decisions of CoC shall be taken by vote of minimum 75% of the voting share of financial creditors• Resolution Professional (RP) (not IRP )will be appointed in the first meeting of CoC

Resolution Plan

Resolution Plan should not contravene any of the provisions of the law for the time being in force

It should also take responsibility for management of the affairs of the corporate debtor

Therefore, resolution plan should confirm the provision for acceptance of all claims by the applicant

Resolution plan is proposed by applicant for insolvency resolution of the corporate debtor as a going concern

Resolution Professional shall issue an invitation to the resolution applicants (third parties through public announcement) to propose resolution plan

NCLT has to approve the Resolution Plan

Ineligible Resolution ApplicantAny person can propose a resolution plan. However Sec 29A of IBC specifies persons not eligible to act asResolution Applicant

An undischarged insolvent

Wilful defaulter in accordance with the guidelines of RBI or is prohibited by SEBI from trading insecurities or accessing the securities market

Has been convicted for any offence punishable with imprisonment for 2 years or more

Is disqualified to act as a director under Companies Act,2013

Has been a promoter or in the management or control of a corporate debtor

At the time of submission of the resolution plan has an account classified as non performing asset

Formulation and Submission of Resolution Plan

Formulation And Submission Of Resolution Plan

Rejection of Resolution Plan

Appointment of Liquidator

Distribution of Assets

Consolidation and Valuation of Claims

Liquidation process

Implementation of Resolution Plan

Moratorium Ceases

Approval of Resolution Plan by NCLT

Number of Days taken to Approve Resolution Plan

Source: National Economic Survey 2018-19

Priority of Claims

Cost and Expenses of Insolvency

Workmen’s dues for the period of 24 months and dues of secured creditors

Wages and any unpaid dues owed to employees, other than workmen, for the period of 12 months

Dues of Central Government and State Government

Unsecured Financial Creditors

Other debts and dues

Order of distribution of proceeds of sale of assets after liquidation

Fast Track Corporate Insolvency Resolution Process

1. A small company as defined under clause (85) of section 2 of Companies Act, 20132. A start up (other than partnership firm)3. An unlisted Company with total assets not exceeding Rs. 1 Crore as per financial statement

immediately preceding the financial year

Can be applied for the following corporate debtors

Time period for completion

90 days from the insolvency commencement dateFurther extension – 45 days

Who can Apply Can be applied by creditor or corporate debt

ProcedureSimilar to normal procedure specified for corporate personsAdditionally, public announcement must be made in Form A and shouldbe published in the website of corporate debtor and in the IBBI website

Definitions• Other than public company whose• Paid-up share capital is =< Rs.50,00,000 or such higher amount

as may be prescribed which shall not be > Rs.5 crore or• Turnover as per its last profit and loss account =< Rs. 2 crore

such higher amount as may be prescribed which shall not be >Rs.20 crore

• Not applicable to holding company or subsidiary company orSection 8 company (Charitable Trust Companies) or any othercompany governed by any Special Act

Small Company Sec 2(85) of Companies Act, 2013

• Applicable to Private limited company or Limited LiabilityPartnership (LLP) and

• Up to 7 years from the date of incorporation/registration andits turnover must not exceed Rs.25 crore in any year from thedate of its incorporation / registration and

• Shall not apply to entity formed by splitting up orreconstruction of a business already in existence

Start up

Voluntary Liquidation of Corporate PersonsCorporate person who intends to liquidate itself voluntarily and has not committed any default may initiate

It shall meet such conditions and procedural requirements as may be specified by the Board

a declaration from majority of thedirectors of the company verifiedby an affidavit stating that -

the declaration shall beaccompanied with -

• they have made a full inquiry into the affairs of the company and theyhave formed an opinion that:

- the company has no debt or- that it will be able to pay it full from the proceeds of liquidation

• the company is not being liquidated to defraud any person

• audited financial statements and record of business operations of the company for theprevious two years or for the period since its incorporation, whichever is later

• Report of valuation of the assets of the company, if any prepared by a registered valuer

Without prejudice to specified conditions a corporate person shall meet the following conditions: -

Contd…within four weeksof such declarationthere shall be -

• a special resolution of the members of the company in a general meeting requiringthe company to be liquidated voluntarily or due any expiry of period or occurrence ofevent as per the articles and appointing an insolvency professional or

• Provided that the company owes any debt to any person, creditors representing2/3rd in value of the debt of the company shall approve the resolution within 7 days

The company shall notify the Registrar of Companies (RoC) and the Board about the resolution toliquidate the company within 7 days of such resolution or the subsequent approval by the creditors

Subject to approval of the creditors, the voluntary liquidation proceedings in respect of acompany shall be deemed to have commenced from the date of passing of the resolution

Normal Procedures for Liquidation of Corporate person shall apply with necessary modifications

After winding up and liquidation, the liquidator shall make an application to NCLT for the dissolution

NCLT shall pass an order that the corporate debtor shall be dissolved accordingly from the date of that order

A copy of that order shall within 14 days from the date of such order, be forwarded to the RoC

Offences And Penalties under IBCSec Offence Penalty

69 Transactions defrauding creditors Fine- Rs.1 lakh to Rs. 1 crore orImprisonment -1 years to 5 years orWith both

68 Concealment of property

Fine - Rs.1 lakh to Rs. 1 crore orImprisonment -3 years to 5 years orWith both

70 Misconduct in course of corporate insolvency resolution process

71 Falsification of books of corporate debtor

72 Wilful and material omissions from statements relating to affairs ofcorporate debtor

73 False representation to creditors

74 Contravention of moratorium or the resolution plan

77 Providing false information in application made by corporate debtor

75 False information furnished in application Fine - Rs.1 lakh to Rs. 1 crore

76 Non-disclosure of dispute or payment of debt by operational creditor Fine- Rs.1 lakh to Rs. 1 crore orImprisonment -1 years to 5 years orWith both

235A Residual punishment of fine for violation of provisions of IBC Fine - Rs.1 lakh to Rs. 2 crore

Recovery of Income Tax when Company is inLiquidation – Sec 178 of Income Tax Act, 1961

Liquidator ofCompany has togive notice ofhis appointmentto IT Authoritywithin 30 days

The assessing officershall within 3 monthsinform the liquidatorany tax due from thecompany or are likely tobe due thereafter

Any asset of thecompany can be soldonly after the amountnotified by the assessingofficer is set aside by theliquidator

Liquidator will bepersonally liable if hefails to give notice to ITAuthority or fails to setaside dues payable

Income tax dues are treated as secured creditors and get priority over unsecured creditors

Judicial Precedents under Income Tax ActWhere assessee-trust filed an appeal against assessment order making certain disallowances and additions inhands of assessee which gave rise to a tax demand, in view of fact that same disallowances and additionsmade under similar circumstances in case of other similar trusts, were deleted by Commissioner (Appeals)and said order still held field, revenue could not carry out recoveries arising out of impugned assessmentorder while appeal filed by assessee was pending - Camelot Enterprises (P.) Ltd. vs. Tax Recovery Officer,Central-3, Mumbai[2019] 105 taxmann.com 155 (Bombay)

Where TRO had issued on assessee a notice dated 18-11-2004 for auction of its attached property and SCvide order dated 16-1-2001 had dismissed SLP of assessee filed against assessment order, period of threeyears enacted in rule 68B(1) of Second Schedule to Income-tax Act would begin to run from 1-4-2001 andnotice dated 18-11-2004 was, therefore, barred by limitation - Rambilas Gulabdas (HUF) vs. Tax RecoveryOfficer Range-7, Nagpur [2018] 98 taxmann.com 309 (Bombay)

Where assessee applies to Settlement Commission for extension of time for payment of demand as per orderof settlement and his application is pending, in such a case, order of Settlement Commission cannot be saidto be 'conclusive' for purpose of rule 68B until assessee's application is disposed of - Rajiv Yashwant Bhale vs.Principal Commissioner of Income-tax, Pune [2018] 401 ITR 408 (Bombay)

Judicial Precedents under IBC

Where Corporate Debtor Jet Airways (India) Limited had huge outstanding debt, both financial andoperational, Corporate Insolvency Resolution Process (CIRP) filed by State Bank of India against it was to beadmitted. It was also held that this matter was of National Importance and Corporate Debtor company havingmore than 20,000 employees, its revival at earliest by a viable Resolution Plan was essential - State Bank ofIndia vs. Jet Airways (India) Ltd. [2019] 106 taxmann.com 267 (NCLT - Mum.)

Where corporate debtor admitted amount due of operational creditor but failed to pay same and applicationfiled by operational creditor to initiate CIRP against corporate debtor was complete in all respect, saidapplication was to be admitted - Pooja Electronics & Appliances vs. Brew Berrys Hospitality (P.) Ltd. [2019]106 taxmann.com 321 (NCLT - Ahd.)

Where resolution plan approved by Adjudicating Authority provides for closure of corporate debtor andretrenchment of workmen of corporate debtor, same being against scope and intent of I & B Code, is inviolation of section 30(2)(e) and thus, that part of resolution plan which provides for closure of corporatedebtor is to be set aside - Industrial Services vs. Burn Standard Company Ltd. [2019] 106 taxmann.com 122(NCL-AT)

Overall Recovery by Financial Creditors under IBC

In ₹

lakh

cro

re

Source: National Economic Survey 2018-19

Global Perspective

Country Recovery Procedure

Singapore • Taxpayers have to pay the tax within 30 days from the date of the Notice of Assessment (NOA)• When payment is not received by the due date, a 5% penalty and subsequently an additional 1% penalty

can be imposed on the unpaid tax• 5% penalty will be informed via late payment penalty letter. If payment is not received, further

enforcement actions may be taken• Further Enforcement Actions - Appoint assessee’s bank, employer, tenant or lawyer as agent to pay the

money to IRAS or issuing a Travel Restriction Order to stop you from leaving Singapore or legal actionshall be initiated

Canada • Set off against any dues owed by the Government or the revenue authority• Intercepting of any funds owed by a third party to the taxpayer• Registering the debt in the federal court• Seizure and selling of assets • Holding another party jointly and severally responsible for the due (Example: Business partner, directors

or any related corporation)

Contd…

Country Recovery Procedure

US • ‘Federal tax lien’ arises automatically when one fails to pay in full, the taxes that have beenassessed, within ten days after the IRS sends the first notice of taxes owed and demand forpayment

• A federal tax lien is a legal claim to taxpayer’s property, including property that is acquiredafter the lien arises

• The Internal Revenue Service may:o Levy (seize) assets such as wages, bank accounts, social security benefits, and retirement

incomeo Seize property (including car, boat, or real estate) and sell the property to satisfy the tax

debto Seize and apply any future federal tax refunds or state income tax refunds against federal

tax liability

recoveries under income tax and insolvency and bankruptcy code€¦ · insolvency and bankruptcy...

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